By Melissa Angell

Law360 (July 19, 2021, 9:31 PM EDT ) An Illinois federal judge on Monday nixed Snap Fitness' bid for business interruption coverage related to COVID-19, finding that the insurer did not breach its contract with the fitness franchise because the health club did not suffer a direct physical loss or damage from the coronavirus.

U.S. District Judge Mary M. Rowland ruled in her 14-page opinion that Snap Fitness closing its business as a result of state-mandated shutdown orders does not entitle the health and fitness club to insurance coverage from Mt. Hawley Insurance Company.

The judge emphasized that several courts nationwide have held "that state-ordered shutdowns are not a basis for a lost business income claim."

"[P]ermitting recovery based on the states' shutdown orders would effectively eliminate the word 'physical' from the contract," the judge wrote in her opinion. "And while the plaintiffs did physically alter their property in response to the orders — installing plexiglass among other changes — such measures do not qualify as a physical loss."

The decision marks an end to Snap Fitness' COVID-19 insurance lawsuit, launched last year after its insurer refused to cover the franchise's business income loss claim, insisting that such a loss was not covered in its policy.

Snap Fitness closed its gyms in response to government orders attempting to curb the spread of the virus, and argued that it suffered a loss as a result of COVID-19 and the related closure orders.

The fitness franchise also said that they lost income due to the novel virus "infesting" their property.

The insurer moved to dismiss the suit, arguing that the fitness franchise isn't entitled to business interruption coverage because it did not suffer a physical or direct loss.

Mt. Hawley Insurance Company further argued that the fitness franchises' COVID-19 contamination claims are not ripe, given that Snap Fitness failed to raise any possible infestations when it first submitted its insurance claim.

And on Monday, Judge Rowland ruled in favor of the insurer and axed the suit.

To back her reasoning, Judge Rowland largely referenced the Eighth Circuit's recent July decision in Oral Surgeons PC v. The Cincinnati Insurance Co. In that ruling, the panel found that Oral Surgeons' suspension of nonemergency procedures as a result of the pandemic didn't cause any direct physical loss or damage.

The panel also said that Cincinnati's policy didn't provide coverage for Oral Surgeons' partial loss of use of its offices without any physical loss or damage.

Applying the Eighth Circuit's decision to the suit at hand, Judge Rowland followed the appellate panel's logic along with the policy's language to determine that "the shutdown is not covered by the policy's business income and extra expense provisions."

As for its infestation claims, Judge Rowland determined that Snap Fitness' argument ultimately fell short to state a valid claim.

"Even if COVID-19 could lead to contamination, the plaintiffs have failed to adequately plead its presence on their property," the judge wrote in her opinion.

Whether businesses are incurring physical damage from the pandemic worthy of loss coverage is an issue that has fueled litigation throughout the past year, as business owners face off against insurers in court over pandemic-related loss claims.

Two national insurance company trade groups in May threw their support behind Cincinnati Insurance Co. in its Seventh Circuit coverage fight over a steakhouse and brewery operator's COVID-19 losses, arguing that all-risk policies do not cover pure economic losses.

American Property Casualty Insurance Association and National Association of Mutual Insurance Companies said commercial property insurance policies only pay for losses related to natural disasters, like fires and hurricanes, and were never intended to cover "economic losses untethered to physical loss or physical damage."

Other insurers, such as Aspen Specialty Insurance Co., have argued that property insurance policies are not designed to extend to coverage against pandemics.

Counsel for the parties did not immediately respond to Law360's requests for comment on Monday.

Snap Fitness is represented by Jeffrey P Goodman of Saltz Mongeluzzi & Bendesky P.C.

The insurer is represented by William M. Daley of Robinson & Cole LLP.

The case is Byberry Services and Solutions LLC et al. v. Mt. Hawley Insurance Company, case number 1:20-cv-03379, in the U.S. District Court for the Northern District of Illinois.

--Additional reporting by Shawn Rice. Editing by Regan Estes.

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